Time for a Finance Re-Think?
As we come back from the summer holidays, it’s not an uncommon time to begin planning that next development project in all its glory.
You might tackle this in one of two ways: firstly, you might want to have a thorough review of everything that happened last time, possibly because you had some negative experiences that you want to analyse and not repeat if at all possible. Secondly, you might be very happy with everything that went on, who you’ve used, and therefore will just continue as is.
This article is focused on those of you that are undertaking the first option, and conducting a thorough review.
1. Reflecting Back
If you are conducting a thorough review, it could be for a number of reasons, and in these cases below rightly so.
Firstly, you might fancy a change. Perhaps you’ve worked with the same lender for a long time, and whilst they’ve by and large worked well, you know the marketplace has moved on, and there may be better options out there.
Maybe you feel you could have prepared differently. Maybe you bought multiple sites into the same limited company, which limited the number of lenders you could use because only one debenture was available. This time you will use separate SPVs.
Maybe you felt you didn’t know all the funding options when you committed to a lender last time, and went with the best of what you knew at that time. This time will be different, and you’ll assess the marketplace in full to make sure your finance costs are as low as they can be.
2. Previous Negative Experiences
You could also be conducting a review because you’ve had some experiences that did not go well, be that with the lender, the broker, the surveyor or the lawyers.
Perhaps you had a torturous completion, with a lack of communication between all parties resulting in one set of lawyers being nowhere near completing compared to the other (not uncommon!)
Perhaps you had cashflow issues as a result of a surveyor down-valuing your site in your view, and lenders being unable to come up with the funds you need.
Perhaps you’ve felt on your own with the lender, who's processes you didn't understand, or a lender that doesn’t communicate as well as you would have liked. That no-one was supporting you or acting on your behalf, and you found the process unsettling and difficult without independent third party support and regular communication.
Perhaps you became frustrated by the over-controlling nature of lending, although that can be difficult to get away from today unless you pay sky high bridging finance rates, and the deal works.
(side note: lenders have unfortunately learnt from bitter experience. When a lender is rolling up interest and being paid back out of sales, they are as incentivised as the developer/borrower to make sure the project completes. Therefore the increasing amount of control is a necessity for both parties).
If you can relate to some of this (or all of this!) then I hear you loud and clear. But now you ask, what is the best way to move forward?
3. Questions Give You the Answers
I’m a big believer that asking yourself the right questions helps you come up with the answers you’re looking for.
If you agree with that statement, then the best place to start is asking yourself a series of questions relating to the last couple of projects, and seeing what answers come up for you. They should really help you focus on where improvements can be made.
The questions will be mainly slanted towards the funding side, but will have some overlap with the construction side too.
We will break the areas down as follows:
4. Review Questions - Lending
- Were you over time and over budget? Why?
- If so, how did the lender work with you on that?
- In any difficult cashflow situations, was the lender flexible or not?
- Did you analyse the finance cost after completion of the project?
- Have you compared the eventual cost of finance against the projected interest in the term sheet? If it is different, why was it different?
(Side note: most people only concentrate on the cost prior to the project, not after. Did the lender live up to expectation or was the projection way off? Why was that?)
5. Review Questions - Communication
- How was the communication between all parties from start to finish?
- Did the lawyers, QS and lender work well during the loan application and legals phase?
- If a broker was involved, did they help well during the application, and more importantly, were they there for you during the build to help liase with the lender?
- Did they do some of the leg work for you, or got involved when you need them to, to resolves issues with the lender? Or were you left to your own devices?
6. Review Questions - Searching & Analysing the Finance Marketplace
- Did you get a good overview of the marketplace when selecting last time?
- What were the reasons you selected the last lender?
- Did the lender you selected perform as you wanted?
- Have you the ability, right now, to assess the best 50+ options in the marketplace, instantly?
- Have you a strong foundation in how today’s lending products differ?
- e.g. how lenders 'cashflow your build costs' differently that hampers comparison, and how lenders apply interest rates differently that hampers comparison?
7. Review Questions - Your Ideal Lender
The ideal type of lender you may want can vary enormously, depending on your risk profile.
Ask yourself these questions:
- Are you happy with your risk profile? The more cautious you are, the less debt you want to take on, which means putting down more cash than you may need to with some lenders. So…
- Do you want to put down as little cash as possible, which often means paying a bit more in interest, or do you like putting more cash down to get a better rate?
- Are you absolutely sure that doing it one way is cheaper than the other, if that is your goal?
- Do you want to use one lender per project, or multiple sources for the same project? Depending on how much cash you’ve got, or wish to put in, you use various i.e. senior stretched and own cash, or senior stretched + equity investment? Or senior, plus mezzanine and or equity investment?
- Have you analysed which scenario is cheaper, should that be your goal?
- Have you considered using a different lender for each project, thereby diversifying risk and learning more about the marketplace from a practical standpoint?
8. Review Questions- Profit Margin Concerns
Any developer will know that profit margins are being squeezed, and now more than ever.
One has to be smart in order to get the margins you’re looking for.
- If you build traditionally, have you considered the new quick build technologies, which can dramatically reduce the time a project takes, and therefore a lot of cost too?
- If importing materials, would hedging, or reviewing your hedging arrangements be wise in the current environment?
- Are you allowing for enough contingency, which can be funded, thus saving you on funds if the projects overruns on cost?
- If you prefer not to fund contingency, are you keeping enough cash back in case a lender cannot provide further funds in a cost overrun scenario?
9. Review Questions - Contractual
One area that is always under review, or could be causing you problems, is the legal and contractual side.
Some of the areas to question are as follows:
- Lawyers - did you use lawyers that have specific development finance experience, or only conveyancing? Using only conveyancers can cause many problems that are unnecessary.
- QS - did you like them and how they worked?
- Collateral Warranties - how difficult was this, and have you considered a potentially easier route with TPRs?
- Anyone charging upfront fees – how did they perform in the long run, and were they worth it?
In summary then, a strategic review from time to time is useful, and having the right tools to think it through is helpful too!
I would close with a few big picture questions that may also help:
- Are you on top of the current marketplace and its options?
- What is it you want from a lender?
- Have you prepared well for the next project?
- What level of support are you looking for from third parties?
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- 9 Lenders offering 90% Loan to Cost
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